What an asset-based lending facility is, and how it differs from a term loan on the same collateral

A term loan secured by your receivables and a revolving asset-based facility secured by the same receivables are not variations on one product. In the first, the collateral is what the lender falls back on. In the second, the collateral is what sets your credit limit, recalculated as often as you report.

The structure

An asset-based facility is a revolving line whose size is a formula rather than a fixed number. You report your collateral, the lender applies advance rates to the eligible portion, subtracts reserves, subtracts what you already owe, and the remainder is what you can draw today. Collections come in and pay the line down, which rebuilds availability, and you draw again. See borrowing base for the mechanics of the calculation.

The commitment amount is a ceiling, not an entitlement. Illustrative only: a 5,000,000 facility with 1,200,000 of eligible collateral behind it is a 1,200,000 facility that month.

The same collateral, two treatments

That symmetry is the whole trade. You get a line that scales with the business, and you accept that the lender is measuring the business continuously.

What you send in

Reporting is the price of admission, and it is real work:

• A borrowing base certificate, weekly or monthly depending on the deal.
• Accounts receivable aging report, usually with an accounts payable aging alongside it.
• Inventory reporting by category, where inventory is in the base.
• Sales and collections journals to prove the roll-forward from one certificate to the next.
• Monthly financial statements, plus annual reviewed or audited statements on larger facilities.

A business without a controller and a reliable system will struggle here. Late reporting is a covenant breach in its own right, and lenders respond to unreliable reporting by cutting advance rates.

What it actually costs

An asset-based facility is priced in more pieces than a term loan, and the headline spread is not the cost. Expect some combination of:

• Interest on the drawn balance only, usually floating over an index.
• An unused line fee on the undrawn commitment.
• A collateral monitoring or servicing fee, often monthly.
• Field exam and appraisal costs, billed to you.
• Closing and commitment fees, and frequently an early termination fee if you refinance inside the term.

Ask for the total of all of it against a realistic average drawn balance. Illustrative only: a facility drawn at an average of 1,500,000 with 30,000 a year of fees on top of interest carries 2 percentage points of additional cost on the money you are actually using. On a facility you barely draw, the same fees are far worse in percentage terms and a term loan may simply be cheaper.

The availability calculation, in full

The lender strips out whatever the agreement makes ineligible: $118,000 aged over 90 days, $64,000 cross-aged because those customers have other invoices over 90 days, $92,000 of concentration above the single-customer cap, $31,000 foreign and intercompany, and $18,000 of contras where the customer is also a supplier. Ineligibles total $323,000, leaving $1,097,000 eligible.

Apply an 85% advance rate: $932,450. Subtract a dilution reserve of 4% of eligible, $43,880, and a rent and priority payables reserve of $25,000. Availability is $863,570.

You already owe $790,000, so today you can draw $73,570 — against a facility whose commitment is several times that. The commitment was never the number.

What a downturn does to the same calculation

Run it again with receivables 15% lower and ineligibles 25% higher, which is what a slow quarter produces: customers pay later, more invoices age past 90 days, and cross-aging pulls in the rest of those accounts.

Eligible receivables fall to about $803,000 and availability to about $625,600. You still owe $790,000. The facility is now over-advanced by roughly $164,400, and that shortfall is typically repayable on demand.

This is the risk that separates an asset-based facility from a term loan, and it is not a credit event caused by anything you did. Ask two questions before signing: how quickly must an over-advance be cured, and is there a permitted over-advance line with a stated size and duration? A facility with no cure mechanism converts a slow quarter into a demand for cash in the quarter you have least of it.

The covenant that bites before the financial ones

Most facilities carry a minimum excess availability requirement — a floor of undrawn availability you must maintain, expressed in dollars or as a share of the commitment. Breaching it can trigger springing covenants, cash dominion, or a default of its own.

In the illustration above, $73,570 of headroom would sit inside many such floors. Ask where the floor is set, and model your own worst month against it, before you treat the line as working capital you can count on.

Who it fits

Businesses whose working capital is genuinely tied up in receivables and inventory, and whose need moves: distributors, manufacturers, staffing firms, businesses with a heavy season. It also reaches companies that cash-flow lenders decline — a recent loss year matters less when the credit decision rests on collateral you report and the lender inspects.

Who it does not fit

Service businesses that bill and collect quickly and hold no inventory, because there is nothing to build a base from. Companies that cannot produce reliable reports on a cadence. And any business whose real problem is that it is not profitable: an asset-based facility converts collateral into cash faster than anything else, which means it also runs out faster than anything else.

The question to settle before you apply

Do you need a fixed sum for a fixed purpose, or a limit that breathes with the business? A term loan answers the first. Everything an asset-based facility does — the reporting, the exams, the potential for cash dominion — is the cost of answering the second.